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Series 63 Client Types and Compensation Practice Questions

Official outline
NASAA Series 63 Exam Content Outline
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8
Updated
Nov 3, 2026

  1. Question 1, hard

    An investment adviser wishes to charge a client a performance-based fee (a share of capital gains or appreciation in the account). Under the regulatory framework applicable to state-registered advisers, this is generally permissible only if:

    • A.The client is a 'qualified client' meeting minimum assets-under-management or net worth thresholds specified by rule
    • B.The client gives written consent after the adviser discloses the fee terms, whatever the client's assets or net worth
    • C.The client is any individual investor, provided the advisory contract is in writing and Form ADV describes the fee
    • D.The adviser is a federal covered adviser, since performance fees are generally reserved for SEC-registered firms
    Show answer and explanationHide answer

    Correct answer: A. The client is a 'qualified client' meeting minimum assets-under-management or net worth thresholds specified by rule

    Performance-based compensation is generally restricted to 'qualified clients' who meet specified net worth or assets-under-management thresholds, reflecting the added risk-taking incentives such fees can create; disclosure alone doesn't make the arrangement permissible for an ineligible client.

    • A. Correct. State rules generally follow the federal approach in Advisers Act Rule 205-3, which limits performance fees to qualified clients. A qualified client meets the rule's minimum assets-under-management or net worth test, and the rule also covers a few other categories, such as certain knowledgeable insiders. Eligibility turns on the client's status, and state-registered advisers must apply it too.
    • B. Incorrect. Disclosure and written consent are good practice, but they do not replace the eligibility test. A client who is not a qualified client cannot be charged a performance fee, however well the terms are disclosed or consented to.
    • C. Incorrect. A written contract and a Form ADV description are required disclosures, but they do not make a performance fee permissible for an ordinary individual investor. The client must still meet the qualified-client test.
    • D. Incorrect. Performance fees are not reserved for SEC-registered or federal covered advisers. State-registered advisers may also charge them to qualified clients under state rules that parallel the federal rule. The deciding factor is the client's status, not the adviser's registration type.

  2. Question 2, easy

    A prospective client wants to understand exactly how her investment adviser is compensated. Including fee schedule, whether fees are negotiable, and any conflicts tied to compensation. Where is this information required to be disclosed to her?

    • A.It need not be disclosed unless the client specifically requests it in writing
    • B.Verbally, at the discretion of the adviser, with a written summary available if the client later asks
    • C.In the adviser's brochure (Form ADV Part 2), which must be delivered to the client
    • D.Within the account opening agreement's fine print, which satisfies the disclosure requirement without a separate disclosure document
    Show answer and explanationHide answer

    Correct answer: C. In the adviser's brochure (Form ADV Part 2), which must be delivered to the client

    Investment advisers are required to provide clients with a written disclosure brochure (Form ADV Part 2, along with any relevant supplements) describing the adviser's fee structure, compensation arrangements, and material conflicts of interest, delivered before or at the time of entering into an advisory relationship.

    • A. Compensation and conflict disclosures must be provided regardless of whether the client specifically requests them.
    • B. Verbal disclosure at the adviser's discretion, with a written summary only on request, doesn't satisfy the requirement for a delivered written brochure.
    • C. Correct. This information belongs in the adviser's brochure (Form ADV Part 2), which must be delivered to the client.
    • D. Placing compensation terms in the account-opening fine print without a dedicated disclosure document doesn't meet the brochure delivery requirement.

  3. Question 3, easy

    A trust account at a broker-dealer names a corporate trustee and an adult beneficiary. The beneficiary phones the agent and instructs him to sell a large position so she can pay a personal expense. How should the agent respond?

    • A.Execute the sale, since the beneficiary holds the economic interest in the trust assets.
    • B.Decline the order, because the trustee holds authority over the trust assets, and refer the beneficiary to the trustee.
    • C.Execute the sale after the beneficiary confirms the request in writing and signs a standard order ticket.
    • D.Execute the sale because adult beneficiaries are permitted to direct activity in the accounts that benefit them.
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    Correct answer: B. Decline the order, because the trustee holds authority over the trust assets, and refer the beneficiary to the trustee.

    A trust account is controlled by the trustee, who holds legal authority over the assets under the trust agreement. A beneficiary has no authority to place orders unless the trust documents grant it, so the agent should take instructions from the trustee.

    • A. Holding the economic interest does not give a beneficiary authority to trade; legal control belongs to the trustee.
    • B. Correct. Only the trustee, acting under the trust agreement, may direct trades in the trust account.
    • C. A written confirmation from the beneficiary does not create trading authority she does not hold.
    • D. Age of the beneficiary is irrelevant; authority comes from the trust document, not from being an adult beneficiary.

  4. Question 4, easy

    A client calls her agent and says, 'Buy me 100 shares of whatever tech stock you think looks good this week, at whatever price makes sense, whenever you think the timing is right.' For the agent to exercise this kind of discretion going forward on an ongoing basis, what must be obtained first?

    • A.A verbal instruction from the client, noted on the order ticket, is sufficient
    • B.Supervisory approval from the broker-dealer, without separate client documentation
    • C.Prior written discretionary authorization from the client, on file with the firm
    • D.Written authorization from the client, kept only in the agent's own files
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    Correct answer: C. Prior written discretionary authorization from the client, on file with the firm

    Choosing the security, the amount, and/or the timing/price at the agent's own discretion on an ongoing basis makes this a discretionary account, which requires prior written authorization from the client (a limited power of attorney) accepted by the firm before discretion may be exercised.

    • A. The client is leaving the choice of security, price and timing to the agent, which is open-ended discretion rather than a narrow time-and-price latitude on a trade she has already specified. A verbal instruction noted on a ticket does not document that grant, so it is not enough for ongoing discretion.
    • B. The firm's supervisory acceptance and review of discretionary trades is part of the process, but it is not the source of the agent's authority. The client must grant that authority herself in writing, so approval with no client documentation leaves the agent trading without proper authority.
    • C. Correct. Before exercising open-ended discretion on an ongoing basis, the agent needs the client's prior written discretionary authorization on file with the firm. The firm can then accept the account and supervise the discretionary trades, which guards against unauthorized trading.
    • D. The client's written grant is the right kind of document, but keeping it only in the agent's personal files is the flaw. The firm must hold the authorization so it can approve the account and supervise the agent's discretionary trades. A record the firm cannot see allows no oversight.

  5. Question 5, medium

    A trustee manages securities held in a trust account for the benefit of the trust's beneficiaries. In making investment decisions, the trustee's overarching legal duty is generally best described as:

    • A.Maximizing short-term returns for the beneficiaries, even where doing so departs from the trust document's terms
    • B.Following the beneficiaries' verbal instructions, even where they conflict with the trust document's terms and prudent investor standards
    • C.Acting in accordance with the trust document and applicable prudent investor standards, in the best interest of the beneficiaries
    • D.Investing in securities that are exempt from registration, since the trustee's duty is to avoid securities that carry registration or market risk
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    Correct answer: C. Acting in accordance with the trust document and applicable prudent investor standards, in the best interest of the beneficiaries

    A trustee's duty is defined by the governing trust instrument and by fiduciary/prudent investor principles, requiring prudent, diversified management in the beneficiaries' best interest. Not simply chasing maximum short-term return, following informal beneficiary requests that contradict the trust terms, or limiting investments to exempt securities.

    • A. Maximizing short-term returns while departing from the trust document's terms would itself breach the trustee's duty, not describe it correctly.
    • B. A trustee follows the governing trust document and prudent investor standards, not beneficiaries' verbal instructions that conflict with them.
    • C. Correct. A trustee must act in accordance with the trust document and applicable prudent investor standards, in the best interest of the beneficiaries.
    • D. There's no requirement that a trustee invest in exempt securities. The duty is prudent investment consistent with the trust's terms.

  6. Question 6, medium

    A married couple opens a joint account with rights of survivorship (JTWROS) and signs the standard joint account agreement with no special restrictions noted. The husband calls in and instructs the agent to sell a position without his wife's knowledge or participation. Absent a contrary agreement on file, is this order valid?

    • A.Yes, either joint tenant may generally enter orders individually unless the account agreement specifies otherwise
    • B.No, both joint owners must jointly authorize each order before the agent may execute a trade in the account
    • C.No, unless the husband has obtained a signed limited power of attorney from his wife for this specific trade and files it with the firm
    • D.Yes for sell orders, but a buy order would require the written consent of both joint owners before execution
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    Correct answer: A. Yes, either joint tenant may generally enter orders individually unless the account agreement specifies otherwise

    In a standard JTWROS account, either joint owner may generally enter orders on behalf of the account unless the joint account agreement restricts that authority (e.g., requiring both signatures). Checks and disbursements, by contrast, are typically required to be made out to and endorsed by all owners. But trading authority is usually independent for each tenant.

    • A. Correct. In a standard JTWROS account with no special restrictions noted, either joint tenant generally has authority to enter orders individually; both signatures aren't required for each transaction unless the account agreement says otherwise.
    • B. Requiring both owners to authorize each order defeats the practical purpose of a joint account; absent a restriction on file, either tenant may act on their own.
    • C. A separate power of attorney, signed or filed, isn't needed for a joint tenant to place an order on a standard joint account; joint ownership itself confers that authority absent a contrary restriction.
    • D. There's no rule distinguishing sell orders from buy orders for joint account authority; either tenant may generally enter either type of order.

  7. Question 7, medium

    Which of the following would NOT typically be classified as an 'institutional investor' under the Uniform Securities Act?

    • A.A state-chartered commercial bank
    • B.An insurance company
    • C.An individual retail investor with a $2,000,000 net worth
    • D.An investment company registered under the Investment Company Act of 1940
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    Correct answer: C. An individual retail investor with a $2,000,000 net worth

    'Institutional investor' is a defined category of entities (banks, insurance companies, registered investment companies, broker-dealers, other investment advisers, qualifying employee benefit plans, etc.). It is not simply any individual who happens to be wealthy, which is a separate concept (e.g., 'accredited investor').

    • A. This IS an institutional investor. Banks are a classic institutional investor category.
    • B. This IS an institutional investor. Insurance companies qualify.
    • C. Correct. A wealthy individual is not, by virtue of net worth alone, an 'institutional investor.'
    • D. This IS an institutional investor. Registered investment companies qualify.

  8. Question 8, medium

    A broker-dealer marks up a corporate bond sold to a customer from a principal position. FINRA's general guidance on the fairness of markups is best described as:

    • A.A firm 5% cap applied to principal trades in equity and debt securities alike, so any markup above that level is deemed unfair without weighing other factors
    • B.A required minimum markup, typically set around 5%, that the firm must charge on principal bond trades so that customers are treated consistently across the firm, and any deviation needs written approval
    • C.A standard that governs markups on equity securities but does not extend to corporate bonds, which are priced under separate fixed-schedule rules
    • D.A guideline (often referenced around 5%) that is not a fixed rule, with actual fairness judged on factors like the security's type, availability, price, and the effort involved
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    Correct answer: D. A guideline (often referenced around 5%) that is not a fixed rule, with actual fairness judged on factors like the security's type, availability, price, and the effort involved

    The so-called '5% markup policy' is a guideline, not a rigid ceiling or floor. Whether a markup or markdown is fair and reasonable depends on multiple factors. The type of security, its availability in the market, the price, the dollar amount of the transaction, and the effort/expense involved in the transaction. And applies to both equity and debt principal transactions.

    • A. FINRA's guidance isn't a rigid 5% cap; it's a flexible guideline weighed against other facts such as the security's type, availability, and the effort involved.
    • B. There's no mandatory minimum markup that must be charged, and no approval is needed to deviate from one; markups simply must be fair and reasonable given the circumstances.
    • C. The guidance isn't limited to equities, and corporate bonds aren't priced under fixed-schedule rules - it applies to markups on debt securities as well.
    • D. Correct. FINRA's markup guidance references roughly 5% as a benchmark, not a fixed rule, with actual fairness judged on factors like the security's type, availability, price, and effort involved in the transaction.

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